US DOLLAR INDEX REVERSES THE DOWNSIDE AND CLINCHES NEW HIGHS NEAR 108.60

• The index fully fades the earlier pullback and regains the upside.
• The dollar prints new nearly 20-year tops around 108.60.
• US inflation tracked by the CPI rose more than expected in June.

The greenback, in terms of the US Dollar Index (DXY), manages to leave behind the initial pessimism and leaps to new cycle tops near 108.60 on Wednesday.

US DOLLAR INDEX REMAINS BID POST-US CPI

The index advances to the 108.60 region, an area las seen back in October 2002, after US inflation figures showed consumer prices rose at an annualized 9.1% in June, surpassing initial estimates. The Core CPI, which excludes food and energy costs, also rose above expectations at 5.9% from a year earlier.

The higher-than-expected CPI prints continue to reinforce the case for a more aggressive tightening path from the Federal Reserve in the next months. Indeed, and tracked by CME Group’s FedWatch Tool, the probability of a 75 bps rate hike receded to around 57%, while the possibility of a full-point increase is nearly 43%.

What to look for around USD

The index pushed higher and clinched new cycle highs well north of 108.00 on Wednesday. The recent sharp move in the dollar, however, could be seen largely in response to the accelerated decline in the European currency.

Further support for the dollar is expected to come from the Fed’s divergence vs. most of its G10 peers (especially the ECB) in combination with bouts of geopolitical effervescence and the re-emergence of the risk aversion among investors. On the flip side, market chatter of a potential US recession could temporarily undermine the uptrend trajectory of the dollar somewhat.

Key events in the US this week: MBA Mortgage Applications, Inflation Rate, Fed Beige Book (Wednesday) – Producer Prices, Initial Claims (Thursday) – Retail Sales, Industrial Production, Flash Consumer Sentiment, Business Inventories (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Escalating geopolitical effervescence vs. Russia and China. Fed’s more aggressive rate path this year and 2023. US-China trade conflict. Future of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is up 0.22% at 108.40 and a break above 108.58 (2022 high July 13) would expose 108.74 (monthly high October 2002) and then 109.00 (round level). On the flip side, the next support aligns at 103.67 (weekly low June 27) seconded by 103.41 (weekly low June 16) and finally 101.29 (monthly low May 30).